CHAPTER 6 Strategy Formulation Business Strategy

CHAPTER 6
Strategy Formulation: Business

Strategy
Strategy Formulation
• often referred to as strategic planning or long-

range planning, is concerned with developing
a corporation’s mission, objectives, strategies,
and policies. It begins with situation analysis:
the process of finding a strategic fit between
external opportunities and internal strengths
while working around external threats and
internal weaknesses.
SWOT ANALYSIS
S -STRENGTH
W- WEAKNESS
O- OPPORTUNITY
T- THREATS
Finding Market Niche
A niche is a need in the marketplace that is currently unsatisfied. One

desired outcome of analyzing strategic factors is identifying niches
where an organization can use its core competencies to take
advantage of a particular market opportunity. The goal is to find a
propitious niche—an extremely favorable niche—that is so well suited
to the firm’s competitive advantages that other organizations are not
likely to challenge or dislodge it.2 A niche is propitious to the extent
that it currently is just large enough for one firm to satisfy its demand.
After a firm has found and filled that niche, it is not worth a potential
competitor’s time or money to also go after the same niche.
Mission and Objectives
• A mission statement has a unique ability to focus the efforts of every

employee in the company if and only if it is designed well and is implemented
with a singular focus.
• An effective mission statement not only needs to be specific to that
organization; it must enable a common thread to highlight and focus the
energy of everyone in the organization in the direction that the top
management team believes is best for the business.
Mission and Objectives
• A company’s objectives are also critical to the effort to

implement a strategy. They can either focus too much on short-
term operational goals or be so general that they provide little
real guidance. There may be a gap between planned and
achieved objectives. When such a gap occurs, either the
strategies have to be changed to improve performance or the
objectives need to be adjusted downward to be more realistic.
Consequently, objectives should be constantly reviewed to
ensure their usefulness.
Business Strategies
• focuses on improving the competitive position of a company’s or

business unit’s products or services within the specific industry or
market segment that the company or business unit serves.
• extremely important because research shows that business unit
effects have double the impact on overall company performance
than do either corporate or industry effects.
• can be competitive (battling against all competitors for advantage)
and/or cooperative (working with one or more companies to gain
advantage against other competitors)
Porter’s Competitive Strategies
■ Cost leadership is the ability of a company or a business unit to design,

produce,
and market a comparable product or service more efficiently than its
competitors.
■ Differentiation is the ability of a company to provide unique and superior
value to
the buyer. This may include areas such as product quality, special features, or
after sale service.
■ Focus is the ability of a company to provide unique and superior value to a
particular buyer group, segment of the market line, or geographic market
Cooperative strategies
• A company uses competitive strategies to gain competitive

advantage within an industry by battling against other firms. These
are not, however, the only business strategy options available to a
company or business unit for competing successfully within an
industry. A company can also use cooperative strategies to gain
competitive advantage within an industry by working with other
firms. The two general types of cooperative strategies are
collusion and strategic alliances.
Collusion
• Collusion is the active cooperation of firms within an industry to reduce

output and raise prices in order to get around the normal economic law of
supply and demand. Collusion may be explicit, in which case firms cooperate
through direct communication and negotiation, or tacit, in which case firms
cooperate indirectly through an informal system of signals. Explicit collusion
is illegal in most countries and in a number of regional trade associations,
such as the European Union
Collusion
• Collusion can also be tacit, in which case there is no direct

communication among competing firms. According to Barney, tacit
collusion in an industry is most likely to be successful if (1) there
are a small number of identifiable competitors, (2) costs are
similar among firms, (3) one firm tends to act as the price leader,
(4) there is a common industry culture that accepts cooperation,
(5) sales are characterized by a high frequency of small orders, (6)
large inventories and order backlogs are normal ways of dealing
with fluctuations in demand, and (7) there are high entry barriers
to keep out new competitors.
Strategic Alliances
• A strategic alliance is a long-term

cooperative arrangement between two or
more independent firms or business units
that engage in business activities for mutual
economic gain.
Reasons of Alliance
1. To obtain or learn new capabilities

2. To obtain access to specific market
3. To reduce financial risk
4. To reduce political risk
Mutual Service Consortia.
A mutual service consortium is a partnership of

similar companies in similar industries that pool their
resources to gain a benefit that is too expensive to
develop alone, such as access to advanced technology.
Joint Venture
• A joint venture is a “cooperative business activity, formed by two or more

separate organizations for strategic purposes, that creates an independent
business entity and allocates ownership, operational responsibilities, and
financial risks and rewards to each member, while preserving their separate
identity/autonomy.
• the most popular form of strategic alliance. They often occur because the
companies involved do not want to or cannot legally merge permanently.
Joint ventures provide a way to temporarily combine the different strengths
of partners to achieve an outcome of value to all
Licensing Arrangements
• A licensing arrangement is an agreement in which the

licensing firm grants rights to another firm in another
country or market to produce and/or sell a product.
The licensee pays compensation to the licensing firm
in return for technical expertise.
Value-Chain Partnership
• A value-chain partnership is a strong and close alliance in

which one company or unit forms a long-term
arrangement with a key supplier or distributor for mutual
advantage.

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CHAPTER 6

Strategy Formulation: Business

• often referred to as strategic planning or long-

A niche is a need in the marketplace that is currently unsatisfied. One

• A mission statement has a unique ability to focus the efforts of every

• A company’s objectives are also critical to the effort to

• focuses on improving the competitive position of a company’s or

■ Cost leadership is the ability of a company or a business unit to design,

• A company uses competitive strategies to gain competitive

• Collusion is the active cooperation of firms within an industry to reduce

• Collusion can also be tacit, in which case there is no direct

• A strategic alliance is a long-term

1. To obtain or learn new capabilities

A mutual service consortium is a partnership of

• A joint venture is a “cooperative business activity, formed by two or more

• A licensing arrangement is an agreement in which the

• A value-chain partnership is a strong and close alliance in

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